Hi All, My partner and I are looking to buy an IP on the east coast. We dont currently have a PPOR as we may not be staying in Perth long term. We pay very little rent so are happy to keep renting for now. Our incomes total approx 250k pa therefore our tax bill is approx 70k My question is should we go I/O and put our savings in an offset on this loan? I know people will ask what is our goal, at this stage it is a simple one.....get into the market with a buy and hold IP then look to purchase a second IP in a year or so and eventually a substantial PPOR ( acreage ) when we know where we want to settle long term. Any advice is most welcome
With this goal in mind, you probably want to be saving as much as you can for the acreage property. An offset account is probably the best place to store your money until you've got somewhere better to put your savings.
Thanks Peter! Have seen your calculations for IO versus P&I, do you still believe that for *most* people P&I is better than IO on an IP? How would the two differ when it comes to tax time or no difference as the interest is tax deductible either way
Really depends a bit on the bigger picture. You need to consider your actual serviceability, deposits available, purchase prices, etc. For example: * Can you service both deals starting with IO repayments? P&I gives a little bit of a servicing advantage, so it would be useful to understand what the margins are. * How much deposit do you have available now, how much do you expect to have when you buy the acreage? Essentially can you put down a 20% deposit for the IP, or is it better to save some of your savings for later and only use a 10% deposit now? If it's a 10% deposit, you may not have a choice and will likely need to use P&I repayments from the get go. P&I and IO both have benefits and trade-offs. At face value in this example I'd probably go IO right now, but that's making a number of assumptions. You need to understand what the financial path is and where the margins are to make the best decision.
I agree with Pete. Instead of smashing the mortgage - set up an offset and park all spare cash into that. Use it for your PPOR in the future. The next question is whether to go P&I or IO - that will come down to the rate spread between the two. Personally - I'd probably be inclined to go P&I. The rate should be a fair bit lower. Keep in mind - when it comes time to borrow for the PPOR - those IP debts will come into play and they might reduce your borrowing capacity by more than you think! Cheers Jamie
Thank you all, leaning towards P&I after your comments. We wont be going 20% deposit so it sounds like we would struggle to get IO anyway. Also as you say @Jamie Moore if the IP has some principal paid down this would likely favour us when buying the eventual PPOR ( which may in fact be in the sunny coast )
P&I loans do help serviceability. It's not really that you're paid down some principal, but that the loan contract obligates you to pay it off over 30 years (in most cases). If you compare this to a loan with a 5 year IO term, the P&I period for this loan is 25 years, so your minimum payment after the IO period is higher than the minimum payment for a 30 year P&I loan. Hence your calculated payment for a P&I loan is smaller, so you've got more spare cash for servicing purposes which allows you to borrow more. It's counter intuitive at first glance, but a P&I loan will lead to better borrowing capacity and there is a logic to this.
